Insight

The importance of planning for uncertainty in business

November 2016

My favourite comedian of all time is Buster Keaton. He is recognized as one of the top three silent film comedians, along with Charlie Chaplin and Harold Lloyd. Buster is also known as one of the greatest stuntmen ever.

Buster took many risks in performing his stunts, most of which were anticipated and carefully planned out. For example, one of his iconic stunt scenes takes place in the final minutes of the 1928 film Steamboat Bill Jr. He is seen standing in the middle of a street during a cyclone when the facade of a house collapses over him. Amazingly, Buster happens to be standing where the facade's open second story window falls and he emerges unharmed.

This scene, judged as the riskiest stunt in silent film history, wasn't a matter of guesswork or luck. Buster and the film crew took extraordinary measures to minimize the risk of Buster being killed by the façade. The size of the window opening gave Buster all of two inches of clearance on either side of his body. A nail was placed at the exact spot where Buster needed to stand. The façade was a fully-formed, heavy-weight structure so that the movie's manufactured hurricane-like winds would not blow the prop off its intended path.

In business today, senior managers take many calculated risks. They occur during contract negotiations, determining what products to develop, evaluating which distribution channels and markets to pursue, and hiring the right employees. In a perfect world, these risks have been carefully considered and planned for within the context of a fully-formed business plan.

One of the outcomes of a proper business plan is a financial forecast that, ideally, looks ahead three to five years. The plan should have a balance sheet, P&L and cash flow forecasts. We often get questions about how much effort to invest in projecting the various elements of the forecast, and how frequently the forecast should be updated.

In today's environment, revising the forecast should be an ongoing effort. Generally, the greater the relevance of an item to the decision-making needs of management, the more frequent that item should be reviewed. Everything from the Four P's (product, price, place, promotion) to general market conditions are relevant examples.

Like Buster's nail in the ground, you may need to know on a daily or weekly basis where revenues are headed. This calculation can impact everything from inventory needs to headcount requirements. Other items may require a far less frequent review. For instance, many companies will find that their facility costs tend to remain static over a long period of time; therefore, their costs may not be that material to the company's bottom line.

But sometimes, risks appear out of nowhere. They require managers to not only react swiftly, but also to work harder at anticipating unforeseen risks and their ramifications ahead of time.

In his 1924 film Sherlock Jr., Buster is seen running across the top a moving train. As he runs out of train, he leaps and catches the chain of a railroad water tower. His weight causes the chain to be lowered and, with that, water comes pouring out of the spout and knocks Buster to the tracks. He then gets up and runs away.

At the time, filming was suspended for two days because Buster was sore and experiencing headaches. About a decade later while examining x-rays during a physical exam, Buster's physician asked him when he broke his neck. At first Buster couldn't recall, and then he remembered filming that Sherlock Jr. scene ten years earlier.

That was a risk that neither Buster nor the film crew anticipated. But today's business leaders cannot ignore planning for an unexpected risk. Management needs to have a back-up plan prepared in advance for such things as natural disasters, security breaches, cyber-attacks, health epidemics and supply chain disruptions, to name just a few. How will you communicate with your employees, customers, vendors and those who have financed your business? Does your business plan have a worst-case scenario for dealing with a three- or six-month delay in funding? What if revenues are cut in half due to economic conditions beyond your control?

These extraordinary events must be 'forecasted' and made part of an implementation plan, reviewed often and updated periodically. Like Buster's collapsing façade, the risks can be real - and the window for error can be small.